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Which is the value of this bond? maturity is 5 years from now; nominal is 6.000...

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Finance

Which is the value of this bond?
maturity is 5 years from now; nominal is 6.000 euros and the couponis 5%?
The market interest rate is 4% for this combination of issuer andmaturity.
Annual coupo 6,000 5.0%
t Ct 1+i (1+i)^t Ct/(1+i)^t
1 300 104.0% 1.04 288
2 300 104.0% 1.08 277
3 300 104.0% 1.12 267
4 300 104.0% 1.17 256
5 6,300 104.0% 1.22 5,178
6,267
What would be different if the market asked for a higherinteres
rate (5%) or for a lower interest rate (3%)?

Answer & Explanation Solved by verified expert
4.2 Ratings (557 Votes)

Annual coupon payments = 5% of Euro 6,000 = Euro 300

Now value of bond = present value of all future coupon payments and maturity amount that will be discounted at 4%. Maturity amount = Euro 6,000 and so cash flow in 5th year = 6,000+300 = 6,300

Year Cash flow 1+r PVIF PV = cash flow*PVIF
1 300 1.04 0.9615 288.46
2 300 0.9246 277.37
3 300 0.8890 266.70
4 300 0.8548 256.44
5 6,300 0.8219 5,178.14
Total 6,267.11

Thus price = Euro 6,267.11

When interest rate is 5%

Year Cash flow 1+r PVIF PV = cash flow*PVIF
1 300 1.05 0.9524 285.71
2 300 0.9070 272.11
3 300 0.8638 259.15
4 300 0.8227 246.81
5 6,300 0.7835 4,936.21
Total 6,000.00

When rate is 3%

Year Cash flow 1+r PVIF PV = cash flow*PVIF
1 300 1.03 0.9709 291.26
2 300 0.9426 282.78
3 300 0.9151 274.54
4 300 0.8885 266.55
5 6,300 0.8626 5,434.44
Total 6,549.56

Thus prices at different rates are:

Rate Price
4% 6,267.11
5% 6,000.00
3% 6,549.56

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Transcribed Image Text

Which is the value of this bond?maturity is 5 years from now; nominal is 6.000 euros and the couponis 5%?The market interest rate is 4% for this combination of issuer andmaturity.Annual coupo 6,000 5.0%t Ct 1+i (1+i)^t Ct/(1+i)^t1 300 104.0% 1.04 2882 300 104.0% 1.08 2773 300 104.0% 1.12 2674 300 104.0% 1.17 2565 6,300 104.0% 1.22 5,1786,267What would be different if the market asked for a higherinteresrate (5%) or for a lower interest rate (3%)?

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